Neil Gorsuch Will Make a Fine Justice

My first choice from the president’s fabulous list of terrific judges – they’re all winners, believe me (no really, solid list) – was probably the judiciary’s twitter laureate, Texas Supreme Court Justice Don Willett, but Judge Neil Gorsuch of the Tenth Circuit was right up there. As you can see by my statement to CNN, I’m pleased as punch with the selection. 

There’ll be time enough to analyze Judge Gorsuch’s work, but after reading a stack of his opinions over the weekend, the most salient parts of his judicial record are as follows:

  1. A keen appreciation for constitutional structure as a guarantor of our rights and liberties.
  2. A real devotion to originalism – probably more than the self-described “faint-hearted originalist” Antonin Scalia – and textualism.
  3. Strong support for the freedom of speech and religion, and the First Amendment more broadly.
  4. Skepticism of the administrative state.
  5. Like Scalia, he construes criminal statutes narrowly, so people aren’t convicted and punished without the government’s meeting its evidentiary burden or establishing that it didn’t violate constitutional rights in arresting and prosecuting defendants.
  6. Really, really good writing, which even Justice Elena Kagan has praised.

Gorsuch also maintains a good relationship with Cato and has published a Policy Analysis with us. In short, Donald Trump has managed to pick a nominee who should please everyone other than progressives: social conservatives, libertarians, legal elites, and I imagine the populists who trust him to pick “the best judges.” Left-wing activists are already talking about how Gorsuch is extreme and is anti-women, workers, yada yada – they have to raise money somehow – but I find it hard to see how Senate Democrats will muster 40 votes to sustain a filibuster against someone who was unanimously confirmed in 2006, particularly with a tough 2018 map.

For more analysis, see my short piece in the New York Post, plus Andrew Grossman and David Rivkin in the Wall Street Journal, as well as these excellent essays by Ramesh Ponnuru and Ed Whelan.

Politicians: Hopelessly Naïve about Government

There are numerous causes of federal government expansion, including special-interest pressures and the ability to borrow-and-spend endlessly.

Another cause was highlighted in a recent story about a Bush-Obama education program: politicians are excessively optimistic and hopelessly naïve about their ability to solve society’s problems top-down from Washington.

Neal McCluskey mentioned the failure of the School Improvement Grant program the other day, but I wanted to highlight the Washington Post summary because this is such a classic failure:

One of the Obama administration’s signature efforts in education, which pumped billions of federal dollars into overhauling the nation’s worst schools, failed to produce meaningful results, according to a federal analysis.

Test scores, graduation rates and college enrollment were no different in schools that received money through the School Improvement Grants program — the largest federal investment ever targeted to failing schools — than in schools that did not.

The Education Department published the findings on the website of its research division on Wednesday  hours before President Obama’s political appointees walked out the door.

The School Improvement Grants program has been around since the administration of President George W. Bush, but it received an enormous boost under Obama. The administration funneled $7 billion into the program between 2010 and 2015 — far exceeding the $4 billion it spent on Race to the Top grants.

The school turnaround effort, he told The Washington Post days before he left office in 2016, was arguably the administration’s “biggest bet.”

He and other administration officials sought to highlight individual schools that made dramatic improvements after receiving the money. But the new study released this week shows that, as a large-scale effort, School Improvement Grants failed.

It is excessively optimistic and hopelessly naïve to think that a new federal spending effort would turn around the nation’s schools after that approach has not worked for five decades. But the Post reveals how deep the blind optimism was in this case:

Some education experts say that the administration closed its eyes to mounting evidence about the program’s problems in its own interim evaluations, which were released in the years after the first big infusion of cash.

The latest interim evaluation, released in 2015, found mixed results, with students at one-third of the schools showing no improvement or even sliding backward.

Even then, Duncan remained optimistic about the School Improvement Grants, which he said had — along with the Race to the Top grants — unleashed innovation across the country.

For more on the causes of government growth and failure, see here and here.

Second Doubts about a Border-Adjustable Corporate Tax (BACT)

First Doubts” dealt with predictions that a 25% rise in the dollar could make a 20% tax on imports disappear with only temporary effects on trade but a $1.2 trillion increase in tax revenues (which would supposedly be paid by foreigners, and without complaint).  

Second Doubts will focus on a key claim that border adjustability is needed because “exports from the United States implicitly bear the cost of the U.S. income tax while imports into the United States do not bear any U.S. income tax cost.”   And we’ll question whether border adjustability is justified because corporate “cash flow” taxes under the House GOP plan are more like value-added taxes than corporate income taxes in other countries.

A Better Way” (a House Republican discussion document of June 24, 2016) says, “In the absence of border adjustments, exports from the United States implicitly bear the cost of the U.S. income tax while imports into the United States do not bear any U.S. income tax cost. This amounts to a self-imposed unilateral penalty on U.S. exports and a self-imposed unilateral subsidy for U.S. imports [emphasis added].”  

That statement makes the case for “border adjustment” – which means the costs of imports (unlike equivalent domestic costs) would cease to be tax-deductible for business and rewards from selling exports would cease to be taxable.  

Since all countries have corporate income taxes, what could it possibly mean to say only our own corporate income tax is an “implicit” tax on exports?  Who pays this “implicit” tax?

What could it mean to say that failure to impose U.S. income tax on foreign factories is a “subsidy to imports?”  

President Trump’s “One-in, Two-out” Rule: Lessons from the UK

Monday saw President Trump force through another executive order - “Reducing Regulation and Controlling Regulatory Costs. The headline was the introduction of a new “one-in, two-out” rule for new regulations:

for every one new regulation issued, at least two prior regulations be identified for elimination, and that the cost of planned regulations be prudently managed and controlled through a budgeting process.

Anything that can be done to focus regulators’ minds on the costs imposed on private businesses and groups of new regulation is probably, on net, positive. But the UK has had a policy like this since 2005, first adopting a “‘one-in, one-out” rule, then a “one-in, two-out” rule and now a “one-in, three-out” variant. The results are widely acknowledged to be mixed. Here are 4 lessons from the UK the Trump administration should bear in mind.

1. Focus on costs, not counting regulations

What really matters is not the number of regulations but the costs imposed on private businesses and civil society organizations. A “numbers” approach could be gamed: a department could introduce a new regulation, and remove a defunct one, while imposing new business costs. Thankfully, both the UK government and Trump’s executive order now recognize this. Section 2, part c) of the order says:

any new incremental costs associated with new regulations shall, to the extent permitted by law, be offset by the elimination of existing costs associated with at least two prior regulations

In the UK though, “one-in, one-out” eventually meant that for every new regulation introduced with a net cost to business, regulations up to an equivalent net cost would be eliminated. It would be better named a “pound-for-pound” rule. When upgraded to “one-in, two-out” every new regulation with net costs to business had to be compensated for by regulatory removal or revision at double the monetary cost of the new regulation. And so on. Whether badly drafted or otherwise, Trump’s version reads more like the “one-in, one-out” rule on cost, albeit having to find the cost compensation across two regulations. If implemented in this way, it could become messy to implement for many agencies. Judging regulation by pure cost rather than numbers, as the UK has done, would be a stronger constraint.

2.  Judge by net costs rather than gross costs

Any new measure, whether regulatory or deregulatory, will generate some costs to private businesses and civil society. If Trump is serious about deregulation, it therefore makes much more sense to assess “net” costs, rather than “gross” costs as a target for the new rule. This was recognized in Britain which now carries out the net cost methodology. Otherwise perverse incentives are created: departments or agencies will be cautious about ever proposing deregulatory measures where benefits to business exceed new costs, because they would still have to find gross cost savings elsewhere. As Stuart Benjamin outlines, steps taken to make pipeline construction easier, for example, otherwise might end up delayed as the agency scrambles around finding existing regulations with gross costs to remove to compensate for the very small costs of a deregulating measure. This might seem an obvious point, but at the moment the order is ambiguous – simply stating that the Director of the OMB will provide guidance “for standardizing the measurement and estimation of regulatory costs.”

Baptists and Bootleggers in the Organized Effort to Restrict the Use of Cash

In a classic account of why prohibitions and other economic restrictions harmful to consumers arise and persist, economist Bruce Yandle noted that such restrictions are often promoted by a coalition between two groups. The first group are morally motivated do-gooders (“Baptists”) who think that the restrictions will promote the public interest. The second group are profit-motivated business people (“bootleggers”) who may adopt the language of the first group but whose aim is to profit by legally quashing potential competition. In Yandle’s example, the prohibition of liquor in the United States during the 1920s was loudly promoted by Baptists and others who considered liquor consumption sinful, and quietly backed by bootleggers whose profits from rum-running depended on the absence of legal liquor.

In today’s organized effort to restrict or prohibit the use of cash we can see the same kind of coalition. The metaphorical Baptists include leading economic advisors like Kenneth Rogoff (recently labeled by one Indian writer “the high priest of demonetisation”) and Larry Summers. They argue that banning cash would fight crime and helpfully give additional power to monetary policy-makers (by enabling negative nominal interest rates). I have criticized these arguments for currency prohibitionism before. Other presumably disinterested advocates advance the implausible claim that reducing the payment options of the world’s poor by banning cash will benefit the poor by promoting “financial inclusion.” I scrutinize this claim below.

Trump’s Exclusion of Immigrants from Specific Countries Is Not Legal

President Trump issued an executive order on Friday that includes a ban on the entry of virtually all nationals from several countries. The same day, the New York Times published my argument that the portion of the ban that bars immigrants or legal permanent residents violates the law, which bans discrimination against immigrants based on national origin.

Andrew McCarthy of National Review Online was kind enough to take the time to publish a response (“Trump’s Exclusion of Aliens from Specific Countries Is Legal”). Because Mr. McCarthy’s article demonstrates significant confusion over my argument, the facts, and the laws at issue, it surprised me to see National Review editor Rich Lowry also cite it favorably. Despite the weakness of its analysis, the piece provides me an opportunity to clarify and reinforce some aspects of my argument that brevity required me to excise from the Times.

1. The Constitution gives the power to make immigration laws to Congress. Mr. McCarthy writes:

Under the Constitution, as Thomas Jefferson wrote shortly after its adoption, “the transaction of business with foreign nations is Executive altogether.” … In the international arena, then, if there is arguable conflict between a presidential policy and a congressional statute, the president’s policy will take precedence in the absence of some clear constitutional commitment of the subject matter to legislative resolution.

In other words, the president can ignore congressional limits in this area. He cites case law in which courts describe the president’s foreign affairs powers with respect to relations with foreign governments as expansive, but cites no case that concludes the president can ignore Congress to exclude immigrants. It is reminiscent of President Nixon’s famous argument that “when the president does it, that means it is not illegal.” It is Congress, not the president, that makes immigration law. “[O]ver no conceivable subject is the legislative power of Congress more complete than it is over… the admission of aliens,” ruled the Supreme Court in Oceanic Steam Navigation Co. v. Stranahan.

Mr. McCarthy had no problem defending this view when the actions at issue were President Obama’s, which were also justified based on “security,” but now adopts it to defend President Trump’s. As my Cato colleagues wrote at the time, “it is not for the president alone to make foundational changes to immigration law—in conflict with the laws passed by Congress and in ways that go beyond constitutionally authorized executive power.”

2. President Trump cannot use the supposed “purpose” of a statute to override its plain meaning. Mr. McCarthy quotes the relevant portion of the Immigration Act of 1965 (8 U.S.C. 1152(a)) that amended the Immigration and Nationality Act of 1952, which clearly prohibits discrimination in the issuance of an immigrant visa based on national origin. But Mr. McCarthy states:

…the purpose of the anti-discrimination provision (signed by President Lyndon Johnson in 1965) was to end the racially and ethnically discriminatory “national origins” immigration practice that was skewed in favor of Western Europe. Trump’s executive order, to the contrary, is in no way an effort to affect the racial or ethnic composition of the nation or its incoming immigrants.

Mr. McCarthy gives no citation for this claim—which contradicts everything the president and his advisors have been saying about the intent being to ban Muslims—but regardless of Mr. Trump’s intention, the result of his actions does affect the ethnic composition of the country, which was indeed one of the actions that Congress in 1965 thought it was banning.

But Mr. McCarthy is again claiming that the president can ignore the plain meaning of the laws of Congress, this time based on its supposed “purpose.” But as my colleagues at the Cato Institute put it, “Unenacted legislative intentions are not law under the Constitution.” It is the text on the page that makes law. Mr. McCarthy condemned this type of legal reasoning as a “post-law” argument when President Obama reasoned this same way in the Obamacare case, King v. Burwell, yet he eagerly adopts it now to defend President Trump.

State Governments as Victims

This was a news headline in the Wall Street Journal yesterday: “States’ Revenue Shortfalls Exacerbate Budget Crunch.” The article said that, “Faced with weak revenue, sluggish growth and possible federal funding cuts, many governors and state lawmakers face a tough budget season.”

That made me laugh. “States as victims” is a common storyline in the mainstream media anytime that state budgets are not growing gangbusters. States need to balance their general fund budgets each year, and so it is true that state policymakers must be more responsible that the spend-and-borrow politicians in Washington. But news stories on the states rarely provide the important context of how much budgets have grown over time.

The chart below—based on NASBO data—shows general fund revenues since fiscal 2010, with projected revenues for fiscal 2017. To achieve annual balance, the “tough” task of state policymakers is simply to keep spending rising no faster than these revenues.

Does the chart look like a “crunch” to you with “weak” revenue? And if 33 percent revenue growth over seven years and 3.6 percent projected growth in 2017 creates a “shortfall,” what do you think the problem is?